Market Review
The resources sector is at an interesting juncture. After years of earning super-profits in commodities on the back of strong Chinese demand growth and insufficient supply, commodity prices have come under pressure as Chinese demand growth is moderating and seaborne supply is responding. Despite the drop in prices witnessed already, further downside, especially in real terms, is likely if the long-term historic relationship between cash costs and commodity prices holds into the future. The important commodities in the JSE resources sector that remain vulnerable to price declines are iron ore, coal, oil, copper and gold. In the case of gold, a number of factors, including the first signs of future slowdown in monetary easing associated with the recovery of the US economy, has dented sentiment towards gold and precipitated a major sell off in price. While the rate and path of a normalisation in commodity prices is nearly impossible to predict, it is highly likely that companies will see much lower profitability in future. In this environment, management teams are likely to shift their focus from growth via new projects to a series of cost cutting and rationalisation steps to maintain dividends and debt levels. The platinum sector already finds itself in this situation. The strong momentum in cost escalations is unlikely to be broken easily, with labour, energy cost and poor productivity the main culprits. Within the longer cycle of commodity price normalisation, we are witnessing shorter cycles of mostly sentiment-driven price rallies on the back of macro-economic news from the US, Europe and China. While the European Central Bank committed itself to protect the Euro "whatever it takes", the road to an ultimate solution in Europe will be bumpy. The Cypriot crisis is a recent reminder of what lies ahead. Demand growth in China remains a significant determinant of fortunes for the SA commodity sector. Its economy is recovering from the 2012 slowdown. It is, however, unlikely that we will see a strong stimulus of the economy as authorities seek to contain property prices, balance investment and consumption growth, improve efficiency and reduce pollution. The most recent data points to a deceleration in the positive growth momentum over the short term. The oil price is supported by geopolitical risks rather than supply and demand fundamentals. A near-term resolution in the factors that support the oil price seems unlikely. Oil counters continue to outperform the resource sector. We remain overweight in oil and gas (Sasol) and prefer the defensive nature of a quality business, such as Billiton. The further downside risk in iron ore prices, combined with the cash flow valuation of the iron ore miners, prompts us to be underweight in the likes of Kumba, Assore and African Rainbow Minerals. In the platinum space, our preference remains for Northam. In gold, we have adopted a defensive position, with exposure to the gold exchange traded funds (ETFs) and better quality counters.

What added to - and detracted from - performance
The Fund benefited from the strong underperformance in gold shares, being underweight the sector and positioned in the more defensive names. Exposure to the rand gold commodity price value through the quarter, as a proxy for gold exposure, also value through the quarter, as a proxy for gold exposure, also added to outperformance. The Fund's underweight position in the iron ore miners contributed strongly. Good share selection within the platinum sector offset the underperformance of Anglo Platinum. Other shares that contributed positively were Sasol and AECI. Negative contributors were the underweight in Mondi Packaging and Omnia, as well as exposure to international diversified miners. Overall, the Fund continued its outperformance versus the average resources unit trust fund in the first quarter.

What SIM did
Early in the quarter, following a strong rally in the platinum counters, the Fund's exposure to Amplats and Northam was reduced. Exposure to the diversified miners (Anglo American and Billiton), as well as Sasol, was trimmed back during the quarter following strong performance. We do, however, maintain overweight positions in these counters. During the quarter, with the rand gold price under pressure, we added to the gold ETF. We maintain a significant position in Northam Platinum, given expected production improvements at its Zondereinde mine and the expected start-up of the Booysendal project in early 2013. We added to the Rio Tinto position established previously.

SIM Strategy
The Fund is guided by its value-based investment philosophy. We prefer shares that are undervalued relative to our estimate of intrinsic value. The Fund's principal objective is capital growth by generating returns in excess of the peers invested in the resource sector.